India, Suddenly Starved for Investment

Construction materials await the return of financing and workers to continue development of this mall site in Gurgaon.Credit
Ruth Fremson/The New York Times

GURGAON, India — Sumit Sapra is a member of that ambitious, impatient generation of young Indians who rode the crest of the global economy. In five years, he changed jobs three times, quadrupling his salary along the way. Even when satisfied with his position, he kept his résumé posted on job sites, in case better offers came along. And he splurged. In three years, he bought three cars, moving up a notch in luxury each time. For weekend jaunts, he bought a motorcycle.

Mr. Sapra’s last and best-paying job was at the Indian headquarters of the financial services arm of General Electric, investing western money in Indian energy projects. But last December, foreign money dried up and Mr. Sapra, with a prestigious degree, was laid off.

“Earlier it was money chasing a few projects,” Mr. Sapra, 30, said of the change that seemed to come virtually overnight. “Now it’s the other way around.”

Not long ago, Indian leaders confidently predicted this country would emerge largely unscathed from the global economic crisis. It is now becoming clear that that view was too optimistic, nowhere more so than in this city south of New Delhi that was once the symbol of India’s economic boom.

A few short years ago, construction sites here buzzed 24 hours a day, crews working through the night, cramming down food from onsite trucks during breaks in the twilight. Now real estate sites lie fallow. The once-booming art market has slowed to a crawl. And charmed professionals with coveted degrees, like Sumit Sapra, are unemployed or taking pay cuts to hold on to their jobs.

India’s phenomenal growth of the last five years was powered in large part by huge injections of cash and investment. Investment accounted for about 39 percent of the country’s gross domestic product in fiscal year 2008, up from 25 percent five years ago. At its peak, more than a third of investment came from abroad, according to Credit Suisse. But in the last three months of last year, foreign loans and direct investment fell by nearly a third, to their lowest level in more than two years.

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Sumit Sapra lost his job at the Indian headquarters of General Electrics financial services arm and has not found another.Credit
Adam Ferguson for The New York Times

In a recent report, the International Monetary Fund said Indian companies were among the world’s most vulnerable, after American firms, because they borrowed aggressively during the boom. Using data from Moody’s, the credit rating firm, the I.M.F. estimated in a recent report that defaults among nonfinancial South Asian firms could climb to 20 percent in the coming year, up from an expectation of 4.2 percent a year earlier. (American firms are expected to default on loans at a rate of 23 percent.)

The decline in foreign investment has taken a big toll on sectors like real estate, manufacturing, infrastructure and even art, which was bolstered by demand from globalization’s nouveau riche here and abroad. In the last quarter of 2008, the economy’s growth rate plummeted to about 5.3 percent, the lowest in five years. While consumer demand, particularly in the countryside, has kept the economy growing, the sudden slowing in the flow of foreign funds will make it harder for the country to grow fast enough to pull hundreds of millions of people out of stifling poverty.

“If India wants to go back to the 8 to 9 percent growth rate, private investment and low cost of capital is essential,” said Jahangir Aziz, the chief economist for India at JPMorgan Chase.

Indian policy makers say they believe the country will grow at 6 percent in the coming year, but the I.M.F. forecasts growth of 4.5 percent.

To help fill the gap left by foreign investment, the government is spending more on infrastructure and social programs. The Reserve Bank of India, India’s central bank, has slashed its benchmark interest rates, but the cost of private loans has not fallen by as much.

After a wrenching 58 percent drop in the Indian stock market last year, the market is up 42 percent since its March low and some foreign money has started to flow into equities. But economists like Mr. Aziz say the government needs to do a lot more, though few expect bigger interventions until the current elections end and a new government takes power in late May or early June.

In the meantime, activity here in Gurgaon has slowed radically. Just off the highway from New Delhi, a giant hole in the ground sits where the country’s largest developer, DLF, had planned to build the nation’s biggest mall, aptly named the Mall of India.

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The countrys largest developer, DLF, had planned to build the nations biggest mall, aptly named the Mall of India, on this site.Credit
Ruth Fremson/The New York Times

DLF officials say that they may reduce the size of the mall and add office space to replace planned retail space.

In the boom, DLF built many of the earliest projects that transformed Gurgaon from a sleepy village into an expansive city that has become home to companies like Ericsson and I.B.M.

DLF turned to foreign lenders and investors like D. E. Shaw, the New York-based investment firm, because they provided money “at lower rates of interest and in larger amounts,” said Rajeev Talwar, an executive director at New Delhi-based DLF. “Today, you have no choice but to go to the Indian banks.”

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But domestic lenders have become more reluctant to extend credit, and the interest rates they offer have made projects unfeasible. Last week, DLF reported that its profits fell 92 percent in the first three months of the year.

A subcontractor, Sunil Kumar Verma, who lays marble floors for builders in Gurgaon, said that business was so bad that half of his 40 workers had returned to their homes in Bihar, a poor eastern state where there was also little work for them.

“All they can do is sit, eat and sleep,” Mr. Verma said.

The art market reflects the collapse of the investment boom at the other end of the wealth spectrum.

Over the last years, gallery owners had no need to cultivate buyers. Money was no object. Many artists cranked out works at a furious pace. Not only did veteran collectors snap up the big-ticket items (a painting by M. F. Husain, for instance, or V. S. Gaitonde) but midlevel works in the range of $100,000 drew plenty of buyers, as well.

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Credit
The New York Times

“There were queues. Shows were sold out prior to opening. We were all on a high,” said Arun Vadehra, who owns two galleries devoted to modern and contemporary art in Delhi and a third in London.

In industry, export companies have been hit hard — diamond polishing units and knitwear factories, for instance, are running at a fraction of their capacity.

The job market is another casualty. Not so long ago, as a lot of money chased a small pool of skilled professionals, salaries skyrocketed. Now, it’s the other way around, as Mr. Sapra, the former G.E. employee, said.

He has looked for work for several months and only last month heard back from a few potential employers. Like many of his peers, he says he will most likely have to settle for less money than he was making earlier — despite his master’s degree from the prestigious Indian Institute of Management.

In the good old days, he invested some of his money in property. Now, he would rather not look at how his assets are doing. He said it would just depress him.

Mr. Sapra is not the only one casting his gaze elsewhere. With the exception of a handful of issues, like food prices, politicians have not spent much time talking about the economy this election season.

Ajay Shah, an economist and columnist, said the next government’s challenge would be to reawaken the “animal spirits” of the private sector by removing restrictions on investment, loosening financial regulations and putting money into infrastructure.

But in India’s chaotic coalition politics, it is hard enough to predict who will come to power, let alone what they will do once they are there.